Share this report:
January 2024 | Issue 260
News
Captive equity is still an option as Carlyle raises fund
Captive equity is still an option as Carlyle raises fund
Tom Davidson
Managing editor
Shant Fabricatorian
CLOs
Despite predictions of poor returns, captive equity funds can still be raised. The latest manager to hit the market is Carlyle Group, the world’s largest CLO manager according to our 3Q23 Creditflux rankings. According to market sources, Carlyle is raising a half-billion-dollar equity fund, which is expected to be complete by the end of the year.
The $500m fund will support around $5 billion of primary market CLO activity managed by Carlyle across both the US and Europe. The manager is understood to be raising money from institutional investors.
The importance of CLO captive equity was highlighted in recent CLO research. Almost every 2024 outlook mentions the challenge of making the arb work for third-party equity as one of the key constraints that will hold back CLOs in 2024.
With most researchers also forecasting that only CLO managers with captive equity money will be able to access the CLO market, most managers are actively looking at the space. But fundraising is easier said than done. One US manager says: “Captive or not, CLO equity at the moment has lousy projected returns. How can you sell a CLO equity fund to LPs when junior mezz is yielding more?”
Lauren Basmadjian, head of US loans & structured credit at Carlyle Group
The timing of the Carlyle fundraising highlights just how critical captive equity funds have become for CLO managers. It was less than six months ago that Carlyle closed on its takeover and rebranding of a small closed-end fund called Vertical Capital Income Fund (now known as the Carlyle Credit Income Fund). The transaction appointed Carlyle Group as the fund’s investment manager and shifted its investment mandate to CLOs, creating a captive equity fund.
The previous portfolio of non-agency residential whole loans was liquidated soon after, to make way for a portfolio of investments in CLO debt and equity tranches. That fund has an AUM of $96m as of October 2023, but since July Carlyle has already priced two new US CLOs as well as a reset.
A spokesperson for Carlyle declined to comment.
Carlyle’s fundraising comes hot on the heels of Irradiant Partners, which launched its third captive equity fund at the end of November.
The third vintage of the Irradiant CLO equity strategy brought in $411m in commitments, passing its target of $400m.
In addition to investing in the equity of Irradiant-managed CLOs the new fund can also invest in both the equity and mezzanine tranches of third-party managed CLOs. The maximum allocation for third-party investments will be 40%, with its new head of structured credit Debdeep Maji leading the team that makes investment recommendations for that strategy.
According to Irradiant, over 95% of investors in the new fund are returning investors from the last vintage of the strategy. “We are honored that so many existing ICLOP investors have again entrusted us with their capital, and we thank them for their partnership,” said John Eanes, Irradiant’s co-CEO. “We are proud of our performance and excited to continue the expansion of our CLO platform with the successful close of ICLOP III.”
Another manager raising funds is Polus Capital Management, as it continues its journey towards US CLO management. According to market sources it secured committed capital from strategic investors to support its first five US CLOs at the start of December.
In total, Polus has raised over $550m in committed capital for CLO equity across Europe and the US since 2014, and currently has $5.3bn of AUM across its European CLOs and loan funds.
MidOcean Credit also raised a CLO fund in the second half of 2023. The new vehicle — MidOcean CLO Equity Fund I — had a first close of $136m.
Share this article:
Global credit funds & CLO's
January 2024 | Issue 260
Published in London & New York.
Copyright Creditflux. All rights reserved. Check our Privacy Policy and our Terms of Use.